End of tax loophole risks dimming Shein’s IPO appeal, say investors

Moves by authorities in the EU and elsewhere to end tax breaks for low-value parcels threaten Shein's profitability and risk denting the fast fashion retailer's long-term attractiveness ahead of its planned stock market debut, said investors who focus on the sector.

Shein, which sells $5 (R91) tops and $10 (R182) dresses online, confidentially filed early in June for a potential blockbuster initial public offering (IPO) in London, Reuters revealed last month.

The fast-growing, China-founded group's ability to convince investors of the soundness of its business case will determine whether it is able to match the $66bn (R1.2-trillion) valuation it achieved in a fundraising round last year.

Critics of Shein, including some lawmakers in the US and Britain, argue it uses customs duty exemptions on low-value packages to undercut rivals on price and avoid customs inspections.

The EU is discussing abolishing the duty-free limit, set at €150 (R2,970), as part of a customs reform proposed in May 2023. Above that threshold, an import duty of 17% is applied to sports trainers, for example, and of 12% to T-shirts.

“In my eyes, this is the biggest uncertainty facing this IPO at the moment,” said Adil Shah, portfolio manager at Delphi Funds, part of Storebrand in Oslo which holds shares in retailer H&M. Shah plans to assess the investment case for Shein when the company provides more information.

In response to Reuters' questions about investors' concerns, Shein said its success comes not from the tax exemptions but from its “on-demand business model”, which it said reduces waste and its stock of unsold products.

Shein offers a far wider selection than rivals, thanks to thousands of largely China-based suppliers which take small orders and scale up based on demand.

“We look forward to working with policymakers and industry peers to review frameworks,” Shein told Reuters with regards to the moves by several countries to close tax loopholes.

The growing debate on ending tax breaks for low-value parcels is creating regulatory uncertainty ahead of Shein's IPO.

The SA Revenue Service plans to increase duties on imported parcels of clothing worth less than R500. Low-value parcels, charged about 20% import duty and with no VAT, would be subject to a 45% duty, plus VAT of 15%.

Brazil's President Luiz Inacio Lula da Silva signed into law a 20% tax on international purchases of up to $50 (R913) last month.

In the US and Britain, some retailers and politicians are pushing to end tax breaks on parcels worth less than $800 (R14,608) or £135 (R3,170) respectively, though there is no imminent move by authorities to do so.

Changes to import duty regimes may force Shein to either increase prices, making its offering less competitive, or cut its thin profit margin. Neither option would be favourable for the company, said Jon Hudson, portfolio manager at Premier Miton in London, which invests in ABF, the owner of fast-fashion retailer Primark.

Companies' valuations are directly linked to expectations for their future growth and profitability.

Shein has not reported any financial figures, but analysts at Bernstein in April estimated its net profit more than doubled last year to $2bn (R36.5bn) from $700m (R12.7bn), giving it a profit margin of 4.4% of sales.

Hudson said: “As long as the loopholes exist, the uncertainty will be an overhang for the stock. The market will always be a bit concerned that the tax advantage is going to be cut.”

Reuters